Using the American standards for vehicle fuel efficiency and emissions featured prominently on the wishlist presented by the alliance of automobile manufacturers when president Trump assumed office, but when the Environmental Protection Agency (EPA) announced a proposal to roll back these standards last spring, automakers did not endorse the move and several opposed it. What strategies are automakers choosing with respect to regulation and why? Jeffrey Soble, a litigation partner at Foley and Lardner, LLP, with special expertise in the automotive industry shares his insights.
Una Jefferson: Can you start by bringing us up to speed on what the current status of fuel economy standards for vehicles is in the United States at the moment? It’s a little complicated.
Jeffrey Soble: You sort of have three or more competing forces. You’ve got the existing Obama Administration Fuel Economy and Global Warming standards. You’ve got the EPA and department of transportation declaring that they want to roll those back or freeze them. You’ve got California fighting with the EPA over that potential freeze and then you’ve got the industry itself sort of caught in the middle of that ongoing dispute.
All of this will get altered over time depending on how electoral politics in the US move in the next two to four years.
Una Jefferson: What is the substantive difference between these competing standards?
Jeffrey Soble: The standards under the Obama administration were for much more aggressive, fuel economy and emission standards and those standards were meant to intensify from 2017 through 2026. What the agencies currently have said is they want to freeze everything at 2020 levels. And the basic upshot of that is, under the prior administration rules, by 2026 we would have been at 54.5 miles per gallon, and under the current freeze we’d be at 37 miles per gallon by 2026.
Una Jefferson: So you mentioned American automakers are caught in the middle. What does this look like? What has their reaction been?
Jeffrey Soble: The reaction depends quite a bit on each company. The most vocal reaction has been from General Motors. General Motors is currently seen as a leader in electric vehicles and having a structural advantage based on its current fleets and technology.
So, GM has stepped in and proposed a middle ground between the two, where it wouldn’t be quite up to the Obama era levels, but it wouldn’t be frozen the way the current administration wants to freeze it.
And I guess a cynic could say that’s because GM thinks they’re going to be able to meet targets more easily and more efficiently than their competitors. So there’s a competitive advantage to having some heightened standards.
Una Jefferson: From what I’ve seen, the proposal seems to focus on electric vehicles rather than on fuel economy standards for the internal combustion engine. Does that sound like a fair characterization?
Jeffrey Soble: I think it’s a little bit of six of one and half a dozen of another because the fuel economy standards are not per vehicle, they are over the fleet. So every time you increase your number of purely electric vehicles, you’re impacting the overall fleet fuel economy standard. So with them saying we want more electric vehicles, that’s going to push that number higher, they would meet that number in part by increasing the percentage of a fully electric or zero emissions vehicles.
Una Jefferson: And what about companies other than GM? How much diversity has there been within the American automotive sector in terms of reactions?
Jeffrey Soble: There hasn’t been that much vocal statement about it. It’s hard to find someone who says the complete roll back and freeze is exactly what we should do. The big issue is that people want certainty more than anything else. Right now we’re at the tail end of 2018, which means these companies are planning on 24 months, 48 months and beyond cycles. So they’ve been planning for years for the increased emission standards and to put it to a complete stop, doesn’t necessarily benefit them and what they want more than anything is to know what it’s going to be and have it stay that way for awhile. They want longterm planning. With the federal government being at odds with the state of California and the California Air Resources board, that uncertainty is that the highest level it could be.
Una Jefferson: Don’t the existing standards provide certainty? They do set a progressively stricter requirement all the way to 2025, so automakers do know what’s going to happen under the existing rules.
Jeffrey Soble: Automakers wanted lower standards.
So instead of meeting 54.5 miles per gallon, they wanted to meet 45 miles per gallon or something like that.
Una Jefferson: So the current move by the EPA has maybe just overshot the desired mark. Is that fair to say?
Jeffrey Soble: Certainly from General Motors perspective, it is.
Una Jefferson: When the EPA announced these rollbacks, they also challenged the ability of California. California currently has this power to set its own standards under the Clean Air Act. The EPA challenged the ability of California to do this. To what extent is it important to automakers to have harmonized standards between California and other states?
Jeffrey Soble: If California continues to have their exemption so that they can set their own regulations, conceivably, you could have regulations in California and the handful of states that follow California and other regulations in all the other states. This essentially would force North American automakers to meet the higher standards. I don’t know how you could sell a car that would meet the standards of California, but have different standards in Colorado. The supply chain and the manufacturing chain is just too intertwined in North America to be able to do that. It would have to increase costs.
Una Jefferson: Without asking you to predict the future, with the current legal battles, how likely do you think it is that there would be a split in the American market in the future with California and perhaps some other states having a separate standards for fuel economy and emissions?
Jeffrey Soble: I can’t fathom that there would be a split American market. Who wins between which standards apply, I couldn’t start to predict, except to say, if in the next presidential election there’s a change, the new administration can stop everything in its tracks. Basically right after the inauguration day. None of this is coming out of Congress. It’s all coming out of the White House. So the idea that long-term there would be this much divergence between California and other places, I can’t imagine it’s going to happen.
Una Jefferson: And do you think that automakers are thinking about potential alternative policies to these standards when they choose their strategic reactions to them? If these standards are a means to get to the end of reducing air pollution and greenhouse gas emissions, there are lots of other proposals on the table like carbon taxes or increasing the gasoline tax in the United States. To what extent do you think automakers are worrying about potential alternatives, especially if the next presidential election, sees a change in administration?
Jeffrey Soble: I will say I don’t have a good feel for that. I think the focus in the auto industry is so much on fuel economy. The only other thing that really pushes it is consumer demand. As much as there’s a push to be greener with higher fuel economy, the fact of the matter is that most consumers in North America are buying larger vehicles with less fuel economy. So I think it’s more consumer preferences than the other possible mechanisms that are in play. I don’t think of the other possible mechanisms probably coming forward. I mean something like an increase in the national gas tax would take a united Congress and White House and that doesn’t seem to be in the offing in the immediate future.
Una Jefferson: I want to finish by asking you whether you think American automakers are looking to the fuel economy and emission standards of other countries when they choose their strategic orientations or responses. Canada is still deciding how it would react if America were to lower its fuel economy standards. There are many other jurisdictions worldwide which have much stricter fuel economy standards than America. America would be trying to sell cars in these countries and also the manufacturers in these countries would be trying to sell cars in the United States. I was particularly struck, looking at GM’s proposal. I think they were proposing to have maybe 7% of their fleet be zero emissions vehicles by 2021, and that’s like half of China’s goal. So how important are international standards?
Jeffrey Soble: I think they’re very important. Just from the economics of the business side, it’s a matter of reducing the amount of cost it takes into making your product. If you can make one product at a plant in Canada or the US or Mexico or Vietnam or wherever it is and sell that same product around the world without change, that is going to streamline your international supply chain and production. And once streamlined, it’s going to be cheaper, it’s going to be easier to manage. US is a large exporter of vehicles and those vehicles are going to countries with different environmental standards. So if everybody could get on the same page, I would think there would be a reduction in cost across the board for everyone because it’s one technology that a car company would have to use to meet these requirements all over the country, all over the world.